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KIC000065 - I,“ Computing the Current Price of A Bond A...

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Unformatted text preview: I,“ Computing the Current Price of A Bond A 2-year bond he: a par value of $1,000 and a coupon rate of 5 percent. The prevailing annualized yield on other bones with similar characteristir: is 7 percent. What Is the appropriate market price of the bond? Calculator: FV-1000 PHT- 1000’.£|5- 50 WI 7 N-z CPT W- C C C +Par PVofbond- +___+ _ (1+k)‘ (mg): (1+Ir) 50 1,050 - 4- IN Bond Valuation Process (cont’d) I Impact of the discount rate on bond valuation El The appropriate discount rate for valuing any asset is the yield that could be earned on alternative investments with similar risk and maturity El investors use higher discount rates to discount the future cash flows of riskier securities D The value 01a high-risk security will be lower than the value of a tow—risk security Bond Valuation Process (cont'd) I impact of the timing of payments on bond valuation c: Funds received eoonercen be reinveeheato earn additional reiume I: A dollar in be received soon he: I higher present value than one to be received later I Valuation of bonds with semiannual payments 0 First. divide the annual coupon by two E] Second, drvidelhe annual discount rate by Mo El Third, double the number of years Of 2 Cl 2 612 + Par nd: ¥ m,———-—v WW” (1+r/2)'+(1+k12)1+ (1+k12)” ...
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